Jake's View | How to counter the doomsters who say China has too much debt
‘There is no fixed percentage danger point for debt to GDP’
Consensus expects China’s debt levels to continue to rise sharply, possibly reaching about 300 per cent of gross domestic product by the end of 2018 and hitting 320 to 330 per cent by the end of the current five-year plan that spans 2015 to 2020.
“These are eye-wateringly high levels of debt for a developed market, let alone an emerging market ...”
SCMP, Dec. 6
Actually it is emerging markets that tend to run the higher levels of debt but let’s leave that aside. The question is whether 300 per cent of GDP would be too high a level of debt for China. I put it at about 215 per cent at present.
Take note first that this is a comparison of apples to oranges, for financial markets a comparison of stock to flow. It’s like saying that Siberia is in danger of flooding because Lake Baikal holds 300 per cent more water than its annual drainage.
The fact is that at some point in your life you may be entirely happy to run a personal debt to GDP ratio of not just 300 per cent but up to 1,000 per cent. It is when you buy a home and your mortgage (debt) may be up to 10 times your annual after tax household income (GDP).